Sole Trader: Trading and Profit and Loss Account and Capital Accounts

ZIMSEC O Level Principles of Accounts Notes: Terms used in the Trading and Profit and Loss account

The Trading and Profit and Loss Account is not balanced off at the end of the trading period

This means there are in no corresponding “balance b/d” in the books

Instead the Net Profit increases the capital of the owner

This is done by crediting the Capital Account of the owner and

Debiting the Profit and Loss Account with the corresponding entry

Every sale that results in profit in fact results in the increase of the business owner’s (proprietor’s) capital

Conversely any loss made on each sale results in a decrease in the proprietor’s capital

Any other revenues made lead to the increase of the proprietor’s capital

Instead of making an adjustment in every case when this happens all these transactions are brought together into different named accounts for example Sales, Purchases and Rent received and rent paid accounts

There are then aggregated in a financial statement called the Trading and Profit and Loss Account

The effect is then computed and transferred to the Capital Accounts

A net loss results in a decrease in Capital which means the Capital Account is debited with the amount of the loss